California's plan to cap greenhouse gas emissions and put a price on carbon is set to take effect on Jan. 1 after the Air Resources Board voted Thursday to make final adjustments in the regulation.

The state board first passed the cap-and-trade program last December. But the board, which normally allows its staff to finalize details, took the unusual step of personally tying up the loose ends of the nation's only comprehensive limit on greenhouse gases. It is the last major regulation the board considered to meet the requirements of AB32, California's greenhouse gas reduction law passed by the Legislature in 2006.

The law requires the state to reduce carbon dioxide emissions to 1990 levels by 2020. The cap-and-trade element covers about 20 percent of that goal, with the majority of the other reductions coming from limiting the amount of carbon in fuel and requiring more efficient vehicles, renewable energy mandates and energy efficiency requirements.

Model for the country

"When the nation is ready to address the growing danger of climate change, as I believe it must and will, California's climate program will serve as a model for a national program," said Mary Nichols, chairwoman of the California Air Resources Board.

Many environmentalists echoed that prediction, though any action in Congress appears unlikely in the near term. Business and industry groups stepped up their criticism of the program as the board neared Thursday's vote, predicting that it would lead to significant job losses and result in businesses leaving the state.

Under the regulation, there will be a limit on carbon emissions starting in 2012 for emitters that produce about 85 percent of the state's carbon emissions. That amounts to about 350 businesses at 600 locations, though it will be implemented first for electrical utilities and large industrial plants and later on fuel distributors. Enforcement will not begin until 2013.

The number of allowed metric tons of carbon dioxide emissions will be capped and then reduced every year until 2020. In all, the regulation is supposed to remove 273 million metric tons of carbon dioxide from the air by that year.

Free and paid credits

Businesses that emit more carbon dioxide than is allowed under the law will have to use "allowances" - or credits - to make up for the difference. The allowances will be mostly free when the program starts in a little more than two months, but eventually businesses will have to purchase credits in an auction - a sort of penalty for exceeding the limit. The board's major action on Thursday was to finalize how credits will be allocated.

The opposition from the industrial sectors, like glass manufacturers and oil refineries, strongly objected to the initial requirement that forces these businesses to pay for 10 percent of their credits. They said paying for the allowances - one previous idea was that they be free - will be crippling as businesses in other states and countries will have a competitive advantage.

Some businesses will remain at the 10 percent payment level - which means 90 percent of their allowances are free - while others will see their payment levels rise over time to about 70 percent. Thirty percent of the credits will remain free under certain conditions. In a letter to the board from the state's major industries and the California Chamber of Commerce, they called the 10 percent requirement an "unjustified, job-killing tax."

"By forcing trade-exposed industries to purchase up to 10 percent of what were to be free emissions allowances, CARB will be in effect imposing a new tax on regulated entities. In addition to being legally questionable, this tax will lead to dramatically higher energy costs that will harm virtually every sector of our economy," they wrote.

Higher water rates

Multiple representatives of water agencies, mainly in Southern California, also told the board that because the regulation covers their energy usage, water rates would increase.

The cost will be about $2.50 per year per household, said air board spokesman Stanley Young, explaining that utilities are covered by the law because of the electricity used in moving water from Northern California to Southern California.

Debra Man, chief operating officer for the Metropolitan Water District of Southern California, which provides water for 19 million people, asked the board for an exemption from the regulation.

She said cap and trade would result in "unnecessary and cumulative costs on our water rates."

Major concessions

But proponents hailed the final approval as another historic step by California to combat climate change and said the regulation is a compromise among many disparate interests and that environmentalists made major concessions.

In addition to the allowances, emitters also could meet up to 8 percent of their required reduction by "offsets," which are other actions, such as planting trees, to reduce the amount of carbon dioxide in the air.

Cap and trade has been the most controversial portion of the effort to meet the carbon emission limits required by AB32. A coalition of groups seeking to protect the poor from the impacts of pollution sued to stop it, contending the plan would have a negative impact on poor communities living near large polluters and arguing the board did not sufficiently consider alternatives as required by state environmental law.

A Superior Court judge in San Francisco agreed, though the work to finalize the regulation was allowed to go forward as staff at the board developed deeper analyses of options. The board also gave final approval to that change.